Required Documentation to Protect both the Client and the Bank :

A properly structured credit agreement must also protect the bank and those it represents- principally its depositors and stockholders-by imposing certain restrictions on the borrower’s activities when these activities has a chance to threaten the recovery of the bank funds. The process of recovering the bank’s funds-when and where the bank can take action to get its fund returned-also must be carefully spelled out in a credit agreement.

Documents to be obtained from the following- i) Borrower

ii) Holder of the instrument, such as FDR, Shares etc iii) Owner of the property

iv) The authorized person in official capacity

Generally there are 4 (Four) steps of documentation. They are:

i) Obtaining of document or instrument from the borrower/ guarantor/ mortgagor

ii) Execution

iii) Stamping (Stampt duty rate enclosed) iv) Registration

Charge documents are generally prescribed in printed forms used by the Bank against credit to be executed by the borrower/party concerned. For all types of credits, there is some common charge documents to be obtained before disbursement. They are:

i) Promissory Note: It is the documents, which ensures that the client promises to pay the

money along with the interest of the loan to the Bank authority.

ii) Loan Disbursement letter: The document is consider as the request or application to

disburse the loan on behalf of the client.

iii) Account Balance Confirmation Slip: It is the document which confirms the amount of money which the client has agreed upon to borrow.

iv) Letter of Revival: It is document as a liability bond for the client to pay back the

money with securities and obligation remaining in force.

v) Letter of Continuity : The document is a promise by the client to continue to repay the

5.7.1 To whom documents to be obtained :

5.7.2 Steps of Documentation :

loan with the interest and it is considered as the liability to pay the installments in every month and in a continuous basis.

Depending on the nature of credit, nature of security, nature of constitutes, some other additional documents are required.

There are different types of charge created on securities considering types of assets, nature of credit and the degree of control over the debtors properly required by the banker. The common ways of charging securities are as follows:

i) Lien ii) Pledge iii) Hypothecation iv) Mortgage v) Assignment vi) Set-off

i) Lien: Lien means right to hold the securities till the liability is adjusted. For excusing the right of lien the following conditions to be fulfilled:

a) The security over which the right is to be executed must be in possession of the creditor who will exercise it.

b) There must be a lawful debt due to the person in possession of the goods by the owner of the goods.

c) There must not be any contract to the contrary.

ii) Pledge: Pledge may be define as the transfer of possession of goods and produce by a debtor to his creditor as security for the payment of a debt or the fulfillment of some obligations by the transferor.

iii) Hypothecation: Hypothecation means the charging of property to secure debt while the possession and ownership of the property remains with the debtor. Documents of title to goods are handed over to the banker..

iv) Mortgage: Mortgage is a transfer of interest in specific immovable property as security by the owner for the payment of debt. Mortgage is mainly two types. Such as:

a) Equitable Mortgage: A mortgage created by mere deposit of title deed relating to mortgage property with the intention to create a security thereon. Under this mortgage both the possession and ownership of the properly remains with the borrower/debtor.

5.7.4 Charging Securities :

Charge on Securities

Hypothecation

Lien Pledge Mortgage

Assignment Set-off

b) Legal Mortgage: In a legal mortgage, the mortgagor transfer the mortgagee the legal title and interest to the property by preparing a mortgage deed duly

registered with the Registry Office. In both the cases, the mortgaged property is retained in the hand of the borrower. Mortgage is created on the immovable property like land, building, plant etc.

v) Assignment: An assignment means a transfer by one person of a right, property or debt (existing or future) to another person. The person who assigns the right property or debt is called the assignor. The person to whom the right, property or debt is assigned is called the assignee. The most common examples of assignment are:

a) Contract money due from Government and Semi Government body b) Supply Bills

c) Book Debts

d) Life Insurance Policy

vi) Set-off: Set-off means the total or partial margining of a claim of one person against another by counters claims by the later against the former. It is combining of accounts between a debtor and creditor, so as to arrive at the net balance payable to one or the other.

vii) Special type of charge - Trust Receipt : Generally goods imported or bought by bank's financial assistance are held by bank as security. Bank may release this lien / pledge of these goods against trust receipt. This means that the borrower holds goods in trust of the bank; trust receipt arrangement is needed when the borrower is going to sell these goods or process it further but borrower has no sufficient fund to pay off the bank loan.

The following steps are important to issue a Bank Guarantee-

1)Usually branch may issue Bank Guarantee if it is covered by 100% cash margin or 100% covered by cash collateral. (If power is delegated to Branch Manager).

2) Get a Current Account opened in applicant’s name.

3) Obtain formal application for Bank Guarantee.

4) Obtain proforma of Bank Guarantee required.

5) Obtain the copy of agreement between the applicant and beneficiary.

6) Prepare a credit report.

7) Obtain margin: Margin is the security of the Bank against the amount of Guarantee is issued. The Bank gives the guarantee as a percentage of the amount of BG. Margin varies from party to party depending on the credit worthiness and respectability of the party.

8) Prepare necessary vouchers for margin: - a) Debit: Party’s Account. b) Credit: Margin Account.

9) Pass liability vouchers for the amount of Bank Guarantee: - a) Debit: Customers liabilities on Bank Guarantee. b) Credit: Bankers liabilities on Bank Guarantee.

10) Realize Commission: Present rate being 0.50% per quarter or as approved by Head Office.

11) Insert the clause in B.G. worded as under: -

“This letter of Guarantee is valid up to ... No claim what so ever will be considered as valid after this date. Bank’s liability under this Guarantee shall stand discharged and extinguished completely after the expiry of the time mentioned above unless during this period claim has been filed with the Bank.”

12) Maintain B.G. issue Register.

13) Note that the period of B.G. should normally be 12 (Twelve) months.

14) Obtain collateral securities where necessary on account of the Bank’s liability for B.G. Equitable/Registered mortgage of immovable properties or any other tangible securities are acceptable.

15) Retain copies of B.G. issued.

16) Issue Registered A/D letter to the beneficiary of the B.G. on date of expiry advising that the guarantee has expired and the guarantee be returned to the Bank within ten days from the date of letter and after which the entry will be removed from the Bank’s record and no claim under this guarantee will be entertained.

17) Reverse the liability entries refund margin and return securities (if any) only after expiry of the notice period.

18) Note that counter Guarantees obtained from the constituents are of continuing nature. 19) Receive back the guarantee bond duly discharged by the beneficiary at the time of en- casement and mark contra date of payment in B.G. issued Register.

Before Opening of a Bank Guarantee If the balance is not sufficient, the customer shall be asked to deposit the amount of shortfall immediately and in case of failure, the matter shall be dealt with as per Head Office instruction. Before settlement of claim under guarantee furnished by the bank, it must be ensured that the claim is lodged as per terms of guarantee and genuine. The customer shall also be informed as usual before settlement of claim.

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While banks today use a variety of different credit review procedures, nearly all banks follow a few general principles. These includes:

i) Carrying out reviews of all types of credits on a periodic basis- for example, every 30,60, or 90 days the largest credits outstanding may be routinely examined, along with a random sample of smaller credits.

ii) Structuring the credit review process carefully to make sure the most important features of each credit are checked.

iii) Reviewing most frequently the largest credits, because default in these credit agreements could seriously affect the bank’s own financial conditions.

iv) Conducting more frequent reviews of troubled credits, with the increasing frequency of review, as the problems surrounding any particular credit increase.

v) Accelerating the credit review schedule if the economy slows down or if the industries in which the bank has made a substantial portion of its credits develop significant problems.

The main major risk of the Bank is the default credit and classified loans. The Bank fails to perform smoothly because of poor handling of default or classified loans.

Inevitably, despite the safeguards most banks build in their lending programs, some credits on a bank’s books will become problem credits. Usually this means the borrower has missed one or more payments or the collateral pledged behind a credit has declined significantly in value.